Question 1

Government agencies in the U.S.are not allowed to insure payments made to a U.S.bank if the underlying contract between the buyer and seller is entirely independent from the letter of credit.

Accepted Answer

Government agencies in the U.S., such as the Export-Import Bank of the United States, can insure payments made to a U.S. bank under a letter of credit, even if the underlying contract between the buyer and seller is independent from the letter of credit. The insurance is typically focused on the credit risk and performance of the letter of credit itself, not the underlying contract.

Question 2

A Bill of Exchange is a specialized type of non-negotiable instrument used to expedite payment in a documentary sale.

Accepted Answer

A Bill of Exchange is actually a negotiable instrument, meaning it can be transferred from one party to another. It is often used in international trade transactions to guarantee payment between the buyer and seller, with the payment typically coming from a bank or other financial institution.

Question 3

If the issuing bank accepts documents that contain a discrepancy,the bank cannot seek reimbursement from the account party,its customer.

Accepted Answer

If the issuing bank accepts documents that contain a discrepancy, it means that the bank has waived its right to claim reimbursement from the account party, its customer.

Question 4

In order to negotiate an order instrument,it must be indorsed and delivered.

Accepted Answer

An order instrument can only be negotiated through endorsement and delivery. Endorsement refers to the transfer of ownership by signing the back of the instrument, while delivery is the physical transfer of the instrument from one party to another. Without both endorsement and delivery, the order instrument cannot be negotiated to a new holder.

Question 5

A documentary draft is a time draft that has thirty (30)day and sixty (60)day increments used in documentary sale transactions.

Accepted Answer

A documentary draft is a written order or bill of exchange used in international trade, where the seller instructs the buyer to pay a specified amount at a specified time. It does not specifically refer to drafts with only thirty (30) or sixty (60) day increments; those are just common terms for drafts, but they can have various terms depending on the agreement.

Question 6

Under accounts receivable financing,the factor is protected from contract claims for defective goods by the holder in due course rules.

Accepted Answer

In accounts receivable financing, the factor (the party purchasing the receivables) is not protected by holder in due course rules from contract claims such as disputes over defective goods. These rules typically apply to negotiable instruments, not accounts receivable.

Question 7

The issuing bank will honor the draft as long as the documents appear to be in good order on their face and correspond to the terms of the letter of credit,regardless of the conditions of the goods received.

Accepted Answer

This statement is true. The issuing bank's obligation is to examine the documents provided by the beneficiary and ensure they comply with the terms of the letter of credit. As long as the documents appear to be in good order and match the stipulations of the letter of credit, the issuing bank will honor the draft and release payment to the beneficiary. The bank's responsibility is to examine the documents only, and they are not required to examine the goods themselves.

Question 8

"Bill of exchange" and "international draft" are two names for the same type of negotiable instrument.

Accepted Answer

Both terms refer to a negotiable instrument used in international trade to facilitate payment between parties in different countries.

Question 9

The holder of a banker's acceptance may convert it to cash immediately at a discount rate,sell it on the discount market,or hold it until it matures,provided the buyer's account has sufficient funds to cover the transaction.

Accepted Answer

The answer of The holder of a banker's acceptance may...

Question 10

The seller's bank acting as an advising bank agrees to transmit the funds received from the buyer's bank to the seller provided the terms of the letter of credit have been satisfied completely.

Accepted Answer

When acting as an advising bank, the seller's bank is responsible for advising the seller of the letter of credit terms and conditions but is not liable for payment unless they have also confirmed the letter of credit. If the terms of the letter of credit have been fully satisfied by the buyer's bank, the seller's bank can transmit the funds to the seller.

Question 11

The Convention on Bills of Exchange as well as U.S.and English domestic laws require the language "bill of exchange" to appear clearly and prominently on the face of the instrument.

Accepted Answer

The requirement for an instrument to be considered a bill of exchange does not specifically include the need for the phrase "bill of exchange" to appear on its face. The essential elements are more focused on the order to pay a certain sum of money.

Question 12

Letters of credit is a revocable commitment by a bank issued on behalf of its client and promising to pay a specific sum of money to a beneficiary upon compliance with the instructions of the letter of credit.

Accepted Answer

Letters of credit are typically irrevocable, meaning they cannot be changed or cancelled without the agreement of all parties involved, including the beneficiary.

Question 13

Under a documentary collection,the banks are acting as the agent of the buyer for collection purposes.

Accepted Answer

Under a documentary collection, banks act as intermediaries between the seller and the buyer, but they primarily act on behalf of the seller to collect payment from the buyer.

Question 14

Terms of the sales contract must be reflected in the letter of credit,if not the buyer must clear all discrepancies upon examination of the letter of credit.

Accepted Answer

The terms of the sales contract should be accurately reflected in the letter of credit, but if there are discrepancies, it is typically the responsibility of the seller to ensure the letter of credit matches the contract terms before shipment. The buyer is not obligated to clear discrepancies; instead, the seller must resolve them to ensure payment.

Question 15

The obligations under the letter of credit between the seller and buyer and independent of the sales contract between the seller and the buyer.

Accepted Answer

A letter of credit is a separate agreement between the buyer, seller, and the issuing bank. The terms and conditions described in the letter of credit are binding on all parties involved and are independent of any sales contract between the buyer and seller.

Question 16

The SWIFT System is an electronic network to handle for the exclusive transmission of international banking transactions and regulated by the World Bank.

Accepted Answer

The SWIFT System is indeed an electronic network for the transmission of international banking transactions, but it is not regulated by the World Bank; it is overseen by the National Bank of Belgium.

Question 17

A back-to-back letter of credit is actually two letters of credit used as a financing device.

Accepted Answer

A back-to-back letter of credit involves two separate letters of credit, one issued by the buyer's bank and the other by the seller's bank, as a means of providing financing for a specific transaction. The first letter of credit serves as collateral for the second letter of credit, which is issued to the seller to pay for goods or services provided to the buyer. This financing technique is commonly used in international trade transactions.

Question 18

Under the UCP,banks are responsible for the consequences of delay or loss in transit of any messages,credits,or documents,or for errors of any telecommunication.

Accepted Answer

Under the Uniform Customs and Practice for Documentary Credits (UCP), banks are not responsible for the consequences of delay or loss in transit of any messages, credits, or documents, or for errors in translation or interpretation of technical terms.

Question 19

Letters of credit are a bank's promise to pay provided that all of the terms and documents required submitted are correct.

Accepted Answer

Letters of credit are a legal agreement between a buyer and seller, but the payment is guaranteed by a bank as long as all the terms and conditions are met and the required documents are provided.

Question 20

A red clause in a letter of credit is a promise by the advising bank to reimburse the seller's bank for loans made to the seller.

Accepted Answer

A red clause in a letter of credit authorizes the advising bank to make an advance payment to the seller before the goods are shipped or services are provided, not to reimburse the seller's bank for loans made to the seller.

Quiz 7: Bank Collections and Letters of Credit